Financial Advisors vs. Investment Advisors

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Contributor, Benzinga
January 5, 2024
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The good news is, you’ve built a portfolio and you’ve got some assets under your belt. The bad news? You’re not certain what’s the best route to take going forward. Managing your finances alone might feel a bit like driving in the dark with no headlights. Financial advisors and investment advisors are both professionals who can shine a light on the road ahead and help you map out a financial future. How do you know which one is right for you?

What is a Financial Advisor? 

A financial advisor is any financial professional who helps you manage your money and investments. Advisors provide tailored advice to help you meet your financial goals. Financial planners are a popular type of financial advisor who specialize in helping you create and meet long-term financial goals. Before working with a financial advisor, make sure you decide what your financial goals are and come up with a list of questions to help you determine if the advisor’s services fit your needs.

Financial advisors often specialize in a particular area and may hold a series of related licenses, which are overseen by the Financial Industry Regulatory Authority (FINRA).  Additionally, many advisors are also fiduciaries. A fiduciary means your financial advisor is legally obligated to act in your best interest by the Securities and Exchange Commission (SEC). 

Pros

  • Setting strategic goals: Financial advisors help you create and implement strategies to meet your long-term financial goals.
  • Working with a knowledgeable expert: Advisors possess deep knowledge about finances and keep up with current market research and trends. You can ask questions whenever you need and advisors will offer research-based strategies to help you make the better decisions.
  • Saving time and energy: For a fee, someone else invests the time and energy to research the market and manage your portfolio for you.

Cons

  • Conflicts of interest: Commission-based advisors might not always have your best interests because their income increases by selling you specific products.
  • Fees versus returns: If you don’t invest a significant amount of money, the fees you pay your advisor may impact how much you earn in returns.
  • Your role: A financial advisor acts on your behalf. However, if you like to be hands on, an online alternative where you have more input might be better for you.
  • Their role: This person may not be a Certified Financial Planner, which is quite specific.

What is an Investment Advisor?

An investment advisor is a type of financial advisor who provides advice and analysis as you invest. They are sometimes referred to as investment managers, portfolio managers, asset managers, or wealth managers. In a nutshell, an advisor’s goal is to put your long-term savings to use by investing them under an appropriate strategy. 

Typically this advisor consults on which securities to add to your portfolio. Securities are a financial instrument that hold monetary value and can be traded. Stocks, bonds or other funds are all examples of securities.

In addition to holding a Series 65 license after passing the Uniform Investment Adviser Law Exam, many advisors are also Registered Investment Advisors (RIAs). RIAs are both a fiduciary and registered with the Securities and Exchange Commission (SEC). Most commonly, RIAs are partnerships or corporations and you work with an individual RIA within.

Pros

  • Fiduciary duty: RIAs are legally obligated to act in your best interest.
  • Fee-only RIAs: Fee-only RIAs charge a percentage based on the assets under management (%/AUM). They cannot earn a commission and only increase their earnings when you do. Conversely, they lose money when your portfolio loses money. This reduces conflict of interest and ensures that growing your portfolio is their top priority.
  • Personal relationship: RIAs focus on building and maintaining long-term relationships with their clients. Establishing trust is a key factor for successfully growing your portfolio.

Cons

  • Commission-based RIAs: Some RIAs are commission-based and receive commissions from transactions with clients. They also aren’t fiduciaries. This means they might not have your best interest at heart and aren’t legally bound to act in your best interest.
  • Minimum assets: Most RIAs require a minimum amount to be a client. Depending on whom you work with, the minimum can be substantial.

Should You Use a Financial Advisor or Investment Advisor? 

Both financial and investment advisors help you manage your holdings and meet your financial goals. So, how do you know whether working with a financial advisor vs investment advisor is right for you? Well, it depends on your goals.

If your main goal is to improve your overall financial situation, a financial advisor’s services may be a good fit for you. Financial advisors help you plan for the future in many different ways. They may assist you with making a budget to manage your debt, from estate planning, tax planning, insurance planning, retirement planning and more.

Working with a financial advisor can help you make better decisions, create strategic, long-term plans and improve your overall financial health. However, if your primary goal is to develop a stronger portfolio, then a RIA’s services might be a better fit for you. 

Your advisor will first assess your financial situation and then work with you to create a strategy to meet your goals. Your RIA considers your personal risk tolerance when offering advice about investment and securities. 

RIAs conduct strenuous research around assets and market patterns that inform their decisions. If you feel comfortable, you can give your RIA permission to purchase for you and take an active role in asset allocation and portfolio management.

Remember, if you are planning specifically for the future or carry a large estate, you may want to find someone who is licensed as a Certified Financial Planner. Consider this when looking as not everyone requires this breadth of planning and support.

How to Find a Financial or Investment Advisor

You’re ready to reach out to an advisor for help. Here are some steps that you can follow to find an advisor that fits your needs.

1. Determine your financial goals. The first thing your advisor will ask you when you sit down together is “What are your goals?” Knowing what your financial goals are will help you decide if the services an advisor offers are a good match for you.

2.  Narrow your search to licensed and fiduciary advisors. You can reach out to a professional organization such as the National Association of Personal Financial Advisors (NAPFA) or use an online resource like SmartAsset, which has a free tool that matches you with a financial advisor in your area.

3.  Compare price to services. Compare what you are paying along with the services you will be receiving. A general rule of thumb is that the more you have to invest, the more your advisor can do for your portfolio.

4.  Check credentials. Ask your advisor about their qualifications and experience. Pay attention to the licenses they hold, whether they are a fiduciary, and their history of handling portfolios or scenarios similar to yours.

Get the Financial Help You Need

Some form of advisor is a good copilot to have on board when navigating unknown roads ahead. Advisors can help you map out where you are going, identify places to stop and take stock, and find the most efficient route to your destination. They are in it for the long haul and will be there to assist you when you hit bumps along the way. Once you have decided whether the services offered by a financial advisor or an investment advisor best fit for your needs, hop in, turn the key and hit the pedal to the medal.

Frequently Asked Questions

Q

Is it better to have a financial advisor or invest yourself?

A

Many people choose to handle their investments independently, without seeking the guidance of a financial advisor. However, there is a growing trend towards utilizing the services of a financial advisor. If you lack confidence in managing your investments on your own, a financial advisor can provide valuable assistance in making important decisions and ensuring your financial preparedness for the future.

Q

Do financial advisors make investments for you?

A

You and your financial advisor work together to refine your short- and long-term goals. Your advisor then helps you stay on track to achieve those goals. Some advisors allow you to handle your own investing. Others provide full-service investment management services, taking care of tasks like trades and portfolio rebalancing for you.

Q

Is it worth using an investment advisor?

A

Not everyone requires an advisor, as it is an additional expense. However, obtaining additional assistance and guidance from financial professionals like an investment advisor, can be crucial in achieving your financial goals, particularly when feeling stagnant or uncertain about the path forward.